The race to market

Industry analysts say the revolution in the business-to-business sector is unstoppable, as manufacturers set up electronic marketplaces to increase flexibility and slash supply costs, reports Brian Davis

It may be tempting to think that the recent avalanche of dot.com share prices means the potential impact of e-commerce has been overestimated. With the benefit of hindsight, economists now recognise that valuations on the USNasdaq index of new e-based companies – and on the UK’s Techmark – were too optimistic, especially in the business-to-consumer sector.

But leading industry consultants maintain that the revolution in the business-to-business sector is now unstoppable. The rules are being rewritten. The experts no longer believe that dot.com start-ups will rule the roost, following the formation of a spate of new electronic trading exchanges based on `bricks and mortar’ sectors. New internet trading exchanges are being launched almost daily in markets ranging from energy and chemicals, to aerospace, paper and metals.

Forrester Research estimates that there will soon be 2000 electronic marketplaces worldwide. These will create confusion, as well as opportunities, for traders, suppliers, regulators and investors.

The electronic exchanges aim to offer cheaper, more flexible trading platforms. Geographically dispersed buyers and sellers with common business interests will be able to browse electronic catalogues, request or bid for contracts, hold auctions and place orders, as well as gain access to the latest market information.

Energy exchange

Recently, a group of 14 big energy and petrochemical companies including BP Amoco, Shell, Conoco and Dow agreed to set up an electronic procurement exchange based on a CommerceOne Marketsite platform. The exchange will handle a large chunk of the companies’ annual procurement spending, which exceeds $125bn.

These companies recognised they had many suppliers in common, but the initiative marks a challenge for independent e-trading exchanges such as those operated by mySAPcom or those set up by individual companies like Chevron’s Petrocosm.com with Ariba.

Aerospace giants with group sales of $120bn, including Boeing, Lockheed Martin and Raytheon, have teamed up with the UK’s BAE Systems to set up an electronic trading platform which will allow them to buy parts from 30,000 suppliers for civil aircraft.

This exchange is also based on CommerceOne’s platform. French firm Aerospatiale Matra and Germany’s DaimlerChrysler, which are merging to form the European Aeronautics Defence and Space group, have been invited to join, but seem reluctant to participate in a US-dominated marketplace. Analysts believe many European firms will also prefer something more locally-based.

The new aerospace marketplace will compete with an independent exchange called myaircraft.com launched in February by UTC, Honeywell and i2, and due on line in the second quarter of 2000. Since Boeing, Lockheed, Raytheon and BAe have each taken equity in their new exchange and plan to float it in the future, it seems unlikely they will support a competing e-marketplace.

In the automotive sector, France’s Renault and Japan’s Nissan Motor have agreed to join the mega-exchange being set up by DaimlerChrysler, GM, and Ford – which together make direct purchases of more than $240bn a year.

The exchange is being created by CommerceOne and Oracle, which were previously involved in individual efforts to create exchanges by Ford and GM – AutoXchange and TradeXchange. These were merged in favour of the joint-industry marketplace. But in another sign of the Euro-split, German car-maker Volkswagen has linked up with IBM, i2 and Ariba to create its own e-marketplace, aiming to slash supply chain costs in half.

Cutting costs

In the chemicals sector, Bayer, Infraserv Hoechst and Deutsche Telekom are planning an internet-based marketplace for trading laboratory supplies, plant components and services, based on a CommerceOne platform. They aim to cut order process costs up to 80%. Bayer is targeting complete supply chain integration via the web, and has also taken a stake in the CheMatch and ChemConnect raw materials exchanges.

In other independent initiatives, Ventro, which runs the Chemdex exchange, has also created an exchange for laboratory supplies, and PaperX.com is targeting 10% of the European paper-buying market by 2004.

But developing an e-commerce marketplace does not come cheap. Ventro estimates it has spent $45m in 19 months to launch its e-market and secure 95 customers. The new oil industry mega-portal will require significant contributions from each of its members, proportional to their annual procurement spend, to meet development costs of $50m-$100m.

Denis Kenny, an e-procurement expert at Ernst & Young, says: `While the internet is not actually driving the extended enterprise, it is a powerful enabler. The value of e-procurement is strong, despite the high price for a global implementation. The benefits will include reducing the cost of processing an order up to 90%, while consolidating expenditure with fewer and better suppliers can offer cost savings of 20-30%.’

Kenny says ease of use is the advantage of e-procurement. `We have seen the virtual elimination of maverick buying through the implementation of e-procurement, with compliance moving from less than 50% to 95% or more. It eliminates transactional clutter and allows the procurement professional to play a more strategic role. But this poses a challenge for the redeployment of traditional buyers, sellers and clerks whose skills are becoming redundant due to e-commerce.’

He adds: `For the first time we are seeing fierce competitors collaborate to establish industry standards for trade, in a bid to reduce costs and improve performance. We are also seeing developments in horizontal marketplaces, where non-competing organisations across a number of industries collaborate on e-commerce initiatives. The big multinationals will be the winners.’

Carnage for suppliers

Most analysts suggest this means carnage for many suppliers. Kenny says: `New e-procurement implementations will typically aim to reduce the supply base by up to 70%. Winners will include those suppliers that develop the skills to leverage the opportunities provided by e-commerce. The losers will be those companies which stand on the sidelines, scratching their heads.’

Scott Latham, senior analyst at AMR Research, anticipates the launch of more exchanges by traditional firms, `as many are becoming reluctant to work entirely with new business-to-business exchanges created by dot.com start-ups’.

AMR Research figures predict that e-commerce in manufacturing will grow from 2.3% of total sector revenues in 1999 to 35.5% (on average) by 2004 (see table).

Electronic exchanges are having most impact in industry supply chains which involve a high level of commodity products. Considering that 80% of procurement is made by `direct’ contract and only 20% through a `spot’ market (when, for example, main suppliers fail to hit delivery schedules or to meet quality specification), `the new exchanges simply don’t have the functionality needed to handle most of companies’ direct purchases’, says Latham.

He suggests that the exchanges need to add a higher level of supply chain integration, better security, and must address scaleability issues. He also forecasts a shake-out. `We are tracking several hundred industry exchanges and that is really going to consolidate in the next year,’ he says. `Exchanges will become more geographically-based, though there will be global exchanges in commodity markets.’

`It all comes down to established relationships,’ says Latham. `Brokers, wholesalers and distributors bring a lot of value to the table and are not easily replaced.’

Small suppliers, however, will face a significant challenge. `There is a misconception that e-commerce is a win-win game to everybody’s benefit. Companies will be squeezing margins in the value chain and rationalising their supplier base. And those efficiencies have to come from somewhere.’

Rene Schuster, KPMG consultant, also believes that suppliers will be squeezed. `Once a corporation has put in place e-procurement for indirect or direct goods, the company is well positioned to drive costs down even further. They are likely to insist that, having reduced the supplier’s operating costs by automating the transactions, their prices should also be reduced.’

Schuster reckons there will be a 50% reduction in suppliers due to e-procurement.

He sees the e-commerce market dividing into two areas – a market space of early adopters such as Microsoft, Dell, Cisco and Compaq, which are at the cutting edge and using internet technology for themselves to sell and distribute products. Then there is the marketplace where companies supply physical products, like the automotive industry, aerospace and oil companies, which are still in the discovery mode.

Direct savings

Schuster claims that most industries see opportunities for e-procurement, but find it easier to handle purchases of `indirects’ like stationery and travel, than `directs’. KPMG suggests companies can save 11% of indirect costs by an e-procurement strategy.

But the bigger benefits will come from use in the direct area. `These contracts are usually relationship-based and far more complex. They are rarely commodity products, and some are highly specialised.’ KPMG estimates savings on `direct’ procurement will be up to 20%.

E-commerce is a great incentive for companies to increase profitability. Schuster predicts: `The extra savings will possibly be used to grab market share. But the internet will also show where prices are artificially high, like in the UK automotive industry.

`Generally, companies will have to change from being functionally driven (by departments) to being more customer-centric and market driven. Most business-to-business organisations face a major challenge giving up control and allowing their customers to dictate the kind of products and services they want in the e-world.’

US research firm Gartner estimates business-to-business transactions will reach $4.5 trillion by 2003. But such growth will depend on cooperation and through the supply chain.

In the more transparent, extensive and flexible supply chain, manufacturers will have to be highly responsive and geared to meet rapidly changing customer demands, where the only constant is change.